Spend Classification Definition

There are a number of different ways to classify spending. One common approach is to divide it into three categories: fixed costs, variable costs, and discretionary costs.

Fixed costs are those that do not change from month to month, such as mortgage or rent payments, insurance premiums, and loan payments. Variable costs fluctuate depending on how much you use them, such as utility bills, credit card interest charges, and gas prices. Discretionary costs are expenses that you can choose whether or not to incur, such as entertainment, travel, and dining out.

Another way to classify spending is into mandatory and optional categories. Mandatory expenses are those that you must pay in order to maintain your current lifestyle, such as housing, food, utilities, transportation, and minimum debt payments. Optional expenses are those that you can cut back on or eliminate altogether if necessary, such as cable TV packages, gym memberships, and vacations.

Still another approach is to divide spending into needs and wants. Needs are items that are essential for survival or wellbeing, such as shelter, clothing, food, water, and healthcare. Wants are items that improve your quality of life but are not essential for survival or wellbeing , such as entertainment products and services , travel , and designer clothes .